A mild risk-off tone has pervaded the market as investors ponder the outlook under a Fed plan to step up the pace of monetary policy normalisation. USD and JPY are the best performing currencies, although movements have been modest.
There has been little market-moving news to drive markets over the past 24 hours and not much economic data to speak of. During local trading hours yesterday, a Japanese government spokesman said North Korea launched four missiles, and that three had landed inside Japan’s Exclusive Economic Zone. That didn’t help risk appetite at a time when investors are questioning how much longer the rally in global equities can continue, against a backdrop of rising global inflation pressures and a Fed more inclined to get moving with plans to raise interest rates.
The S&P500 is down about 0.5% at present, following a similar fall for the Euro Stoxx 600. The VIX index is up from the sub-11 close at the end of last week to 11.5.
The USD has recovered some of the losses seen at the end of last week, after Yellen all but confirmed that the Fed would be raising rates next week. The USD major currency TWI is up about 0.3%, with the Yen the only major currency to keep pace with that recovery. USD/JPY is hovering close to 114.
Against that backdrop the NZD has slipped further after its significant underperformance last week, where it fell on all the major crosses. This sees it probing the area around 0.7000 and just under this morning. An expected chunky fall in dairy prices in the GDT auction tonight isn’t helping sentiment. Falling prices on the NZX futures market has reduced the upside risk to Fonterra’s payout projection we previously saw. Yesterday we reduced our forecast milk payout for the current season by 30 cents to $6.10. Indicators suggesting a weaker housing market aren’t helping either. Dwelling permits barely rose in January after being hammered over November and December.
The NZD is now well on its way towards falling to our year-end target of USD 0.67, but our recent upgrade which slowed its projected path over the short term is currently being challenged. Our short term model suggests that unless risk appetite collapses over the short term or commodity prices plunge, then the circa 3 cent fall over the past month has not been justified. The narrowing NZ-US short term interest rate differential is currently being given a higher weight in the eyes of traders at present, but following that indicator for much of the past year would have been a costly mistake for traders.
The NZD’s underperformance sees levels on various crosses not seen for some time. NZD/AUD is down to 0.9230, NZD/EUR looks like testing the 0.6600 area, NZD/GBP is testing 0.5700 and NZD/JPY is down to 79.75.
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